AN EYE ON RETIREMENT:Wealth Creation and Preservation
Wilmot George, CFP, TEP, CLU, CHS
Vice President, Tax, Retirement and Estate Planning
Agenda
• Canada’s retirement landscape
• Canada’s retirement incomelandscape– Government benefits
(OAS/CPP/QPP)
– Employer-sponsored benefits
– Personal savings
• Death and taxes
Canada’s retirement landscape1
• 6.4 million retired or semi-retired people in Canada– 1/5th of overall population
• 46% controlled circumstances surrounding retirement; 54% did not– 48% retired earlier, 6% later, due to circumstances beyond their control
• 48% of retirees worried about outliving their income; 74% of those still working have the same worry
• Average retirement age is 63– Trending upward – 62.1 in 2010
1Source: Angus Reid Institute; 2015 survey of 1,927 Canadian adults
Affordability of a Canadian retirement1
62% of retirees do not have enough money for extras or struggle to make ends meet
1Source: Angus Reid Institute; 2015 survey of 1,927 Canadian adults
Retirement funding1
“A government pension is a primary source of retirement income for two-thirds (67%) of those struggling to make ends meet…1”
“[Registered and non-registered investments] were cited much less often by the struggling group, who were more likely to say they have downsized…or used other means…to support themselves in retirement.1”
1Source: Angus Reid Institute; 2015 survey of 1,927 Canadian adults
Canada’s retirement income landscape
• Government-sponsored
• Employer-sponsored
• Personal savings and other
Government benefits
Source: The Pension Puzzle, 3rd Edition
Old age security (OAS) – Facts and figures1
Basic Pension
Covers Citizens and residents; age 65+
Maximum monthly pension (2018) $587
Taxable? Yes
Indexed for inflation? Yes
Earliest eligibility age 65
Income reduction threshold (2018) $75,910; full elimination at $122,843
1Current to March 2018
OAS/GIS – Recent changes
• Age of eligibility
– Effective April 2023, age of eligibility was to increase to 67
– New Liberal government not in favour of this change; returned eligibility to age 65
• Option to defer
– Can defer take-up for up to 5 years
– Deferred pension means increased benefits in future
– GIS benefits not eligible for actuarial adjustment
When to take OAS – Factors to consider
• LIFE EXPECTANCY
– General rule of thumb: Shorter – take early; longer – take later
• DO YOU NEED THE CASH?
– Still working/investment or rental
income/employer pension payments
• WHAT WILL YOU DO WITH THE PAYMENTS?
– Consume or invest? Can you earn a better return investing personally?
• VIEW OF OAS PROGRAM
– Will it be there when you need it?
Important: One size
does not fit all.
Canadians should
work with a
financial advisor to
determine most
suitable options.
Beware OAS clawbacks
• OAS benefits reduced, subject to income
• Reduction threshold:
– $75,910 – $122,8431
• Clawback rate: 15%
• Example ($85k net income):
=($85,000 – $75,910) X 15%
=$1,364/year or $114/month1Current to March 2018
Tips for avoiding OAS clawback
• Defer OAS take-up
• T-Class mutual funds
• Try capital gains instead of dividends (eg.corporate class)
• Keep debt to a minimum; less $$$ needed to fund debt
• Consider spousal RRSPs for future income-splitting
• Consider C/QPP sharing and pension income-splitting
• As you age, consider gifting
Split eligible pension income1
• Up to 50% of eligible pension income can be split between spouses or common-law partners
• Form T1032 “Joint Election to Split Pension Income”
• Eligible pension income?
– Income eligible for the pension income credit
Any Age Age 65 or older
-Periodic RPP payments
-Successor annuitant RRIF payments
-RRIF payments
-LIF/LRIF payments
-DPSP annuity payments2
-RRSP annuity payments2
-Non-registered annuity income2
1Federal rules. Some differences for Quebec tax purposes 2Splitable at any age if received due to spouse’s death
Splitting eligible pension income– Example: Pierre and Margaret
Without pension-splitting
Pierre
Eligible pension income $60,000
Tax @ 30%1 $18,000
Margaret
Eligible pension income $0
Tax @ 15%1 $0
Total tax paid $18,000
Tax Savings
1Tax rates assumed; assumes Pierre and Margaret have other income in addition to eligible pension income
Splitting eligible pension income– Example: Pierre and Margaret
Without pension-splitting With pension-splitting
Pierre
Eligible pension income $60,000 $30,000
Tax @ 30%1 $18,000 $9,000
Margaret
Eligible pension income $0 $30,000
Tax @ 15%1 $0 $4,500
Total tax paid $18,000 $13,500
Tax Savings $4,500
1Tax rates assumed; assumes Pierre and Margaret have other income in addition to eligible pension income
CPP/QPP – Facts and figures1
CPP (2018) QPP (2018)
Year’s maximum pensionable earnings (YMPE)
$55,900 $55,900
Year’s basic exemption $3,500 $3,500
Employee/employer maximum premium (4.95%) $2,594 (5.40%) $2,830
Self-employed maximum premium (9.90%) $5,188 (10.80%) $5,659
Monthly Maximum
Retirement benefit (at age 65) $1,134 $1,134
Disability benefit $1,336 $1,336
Death benefit $2,5002 $2,5002
1Current to March 2018; 2One-time payment
CPP – recent changes
• Elimination of work cessation test
• Introduction of post-retirement benefit1
• Change to pre-/post-65 take-up
• Enhanced general drop-out provision2
• Retirement savings reform
1For working pensioners; mandatory from ages 60-64, optional thereafter2From 15% to 17%
The debate – retirement savings reform
• Ongoing debate over retirement savings reform
• Previous federal government preferred voluntary options
– PRPP, TFSA, RRSP
• Some provinces preferred mandatory option; enhanced CPP
• May 2014: Ontario proposed Ontario Registered Pension Plan (ORPP); Feds criticized plan, said they would not co-operate1
• Oct 2015: Federal election – New government announced plan to consult on options
1In 2015 letter to Ontario government, federal government indicated that they would not co-operate with administration of ORPP
June 2016: Agreement reached to enhance CPP
Source: Department of Finance
Enhanced CPP – what are the details?
• Will replace 33% of pensionable earnings1 (instead of 25%)
• Pensionable earnings will increase to $87,200 by 2025 (instead of $55,900 currently)
• Premiums will increase by 1% for both employers and employees
• To offset cost to low-income workers WITB2 to be enhanced
• Tax deduction for enhanced portion of employee premiums
• Changes to be phased-in gradually beginning Jan 2019
1Pre-retirement pensionable earnings; 2Working Income Tax Benefit
Enhanced CPP – who will benefit?
• Young employees
– To earn full enhancement, person must contribute for 40 years beginning in 20251
– Others will benefit to a lesser extent depending on age
• Ontarians
– An enhanced CPP will be simpler to introduce and administer than an all-new Ontario pension plan
– With CPP enhancement, ORPP will not proceed
1After phase-in period
Enhanced CPP – what drove the changes?
• Inadequate retirement savings, particularly by younger middle-income earners
• New government, new approach
• Declining availability of traditional company pensions
• Potential launch of ORPP
CPP Changes – some support…
…and some critics
Registered pension plans – On the decline
• From 1997-2011, the proportion of employees covered by RPPs dropped by 11%1
• Only 38% of employees participate in a RPP1
• There is a growing disparity between workplace pension plans in the public and private sectors2
– # of workers with a pension plan: Public – 80% vs. Private – 25%
– Majority of pensioned employees (50.2%) are government workers
1Statistics Canada (2014); 2Globe and Mail (2011)
Registered pension plans – On the decline
Source: Statistics Canada – New facts on pension coverage in Canada (Dec 2014)
What about personal savings
Options for deploying personal savings:
• Annuity
• Guaranteed Minimum Withdrawal Benefits (GMWB)
• RRSP/RRIF/LIF income
• T-Class distributions
• Systematic Withdrawal Plans (SWPs)
• TFSA income
Personal savings –A look at the cash flow options
Annuity GMWB LIF/RRIF T-Class SWP TFSA
Guaranteed lifetime income
*
Flexible access to cash
Control over investments
Tax-efficiency (non-registered)
Availability of inheritance
*Subject to excess withdrawals
DEATH AND TAXES
Taxation at death – Income tax
• Non-registered assets (including real estate) “deemed disposed”– Difference between value and cost taxed as capital gain on final
tax return
• RRSPs and RRIFs also disposed– Fully taxed unless transferred to spouse or financially
dependent child/grandchild’s registered plan or annuity
Income tax – Ontario rates (2018)
2018 rates – Ontario; Source: Taxtips.ca
Taxation at death – Probate tax
• What is probate?
– Confirms executor authority to distribute estate assets
– May be required by asset administrator(s) to transfer estate assets; not required in all cases
– Granted by province upon application
– In Ontario, known as “Certificate of Appointment of Estate Trustee With (or Without) a Will”
– Appoints an administrator in the case of intestacy
– Fee levied by the courts for this process
Probate fee calculation – Ontario
Estate Value Probate Fee
< $50,000 0.50%
> $50,000 $250 + 1.5% of amounts in excess of $50,000
ExampleEstate value = $2,000,000Probate Fee = $250 + 1.5% of $1,950,000
= $29,500
Taxation of vacation properties
• Cottage cost = $400,000
• Renovations = $50,000
• ACB = $450,000
• FMV = $1,000,0003
Capital gains tax
= ($1,000,000 – $450,000) x 50% x 54%
= $148,500
Probate fee
=$250+(1.5% x $950,000)
=$14,500
Nathan1, a widower, has two children - Sandra (33) and
Kyle (27). He wishes to transfer his cottage2 at death.
1Ontario resident2No mortgage; Ontario property3Value at death
Tips for reducing tax payable
Talk To Your Financial Advisor!
Tips for reducing tax payable
• RRSP/RRIF income as determined by tax brackets
• “Crystallize” capital gains periodically
• Result: Reduces income in year of death – less tax at top marginal rate
Draw Income In Retirement Years
2018 rates – Ontario – Source: Taxtips.ca
Tips for reducing tax payable
Named Beneficiaries - RRSPs, RRIFs & Insurance Policies
• Reduces estate value for probate purposes
• Allows beneficiaries immediate access to funds
• Avoids complex estate settlements
• RRSPs/RRIFs left to spouse or minor children normally transferred tax-free1
• Where taxable, be mindful of tax on RRSP/RRIF– Estate liability
1When transferred to registered plans or certain annuities
Tips for reducing tax payable
Consider Joint Accounts
• Assets registered jointly typically bypass estate of the deceased – reduces probate tax
• Best used with spouses; can be used with adult children
• Capital gains tax can result when joint owners are added
• Good idea to document intent in “side document” to avoid conflict after death
Joint tenancy SNAFU…
Consider this:– Mary – Mother ($50,000 investment account)
– Beth – Daughter #1
– Kim – Daughter #2
– For convenience, account registered jointly (JTWROS) with Beth
Q: Who is right? Beth or Kim?
Presumptions of common law
• Under common law, generally two presumptions for gratuitous transfers:
• Presumption of Advancement (PA)
– Presumes individual making transfer intends to make a gift
– Spouse to spouse; parent to child
• Presumption of Resulting Trust (PRT)
– Presumes property is held by joint owner in-trust for estate
– Sibling to sibling; friend to friend, etc.
Supreme Court weighs in…
• Presumptions tested in Supreme Court in May 2007
• Court clarified use of presumptions
• Presumption of Advancement (PA)
– Spouse to spouse; parent to minor child
– Onus on estate to prove otherwise
• Presumption of Resulting Trust (PRT)
– Transfers between anyone else
– Onus on joint owner to prove otherwise
Back to our example…
• Under the new rules, Mary’s estate flowed through her estate and was subject to her will
– Divided between Beth and Kim
– Probate tax; legal fees; ongoing rift between siblings
• Why? Intention not clear
• Be sure to document intentions
– Deed of gift/Bare trust declaration
Tips for reducing tax payable – Charitable giving
• Tax credit for up to 75% of net income (up to 100% in year of death and year prior)
• ZERO capital gains tax on gifts of publicly traded securities to charity
• Example: Tax Credit Calculation (Ontario resident)
Donation $100,000
Federal and Ontario credits $40,1201
Total cost of gift $59,880
1Ignores 33% federal tax credit rate for gifts from income > $200K
Consider donations “in-kind”
• Justin holds CI Signature Canadian Balanced fund with a FMV of $50K; wants to make a $50K donation to charity
Cash donation
Market value $50,000
ACB ($20,000)
Capital gain $30,000
Taxable capital gain (50% vs 0%) $15,000
Tax on capital gain (at 50%) (A) ($7,500)
Tax benefit of gift (at 40%) (B) $20,000
Net tax benefit (A+B) $12,500
Consider donations “in-kind”
• Justin holds CI Signature Canadian Balanced fund with a FMV of $50K; wants to make a $50K donation to charity
Cash donation “In-kind” donation
Market value $50,000 $50,000
ACB ($20,000) ($20,000)
Capital gain $30,000 $30,000
Taxable capital gain (50% vs 0%) $15,000 $0
Tax on capital gain (at 50%) (A) ($7,500) $0
Tax benefit of gift (at 40%) (B) $20,000 $20,000
Net tax benefit (A+B) $12,500 $20,000
Net savings from donating in-kind $7,500
Tips for Reducing Tax Payable
Gift Assets Before Death
• Reduces value of estate subject to probate tax
• Ensures beneficiaries receive assets intended for them
• Reduces potential for conflict between estate beneficiaries
• Prior to death, future growth accrues to beneficiary instead of donor
• Note: Loss of control; possible taxation at time of gift
Life insurance as an estate planning tool
• Normally serves one of two purposes:
– Preserves an existing estate
– Creates an inheritance
• Can be used to:
– Pay off liabilities (including taxes)
– Establish a fund for ongoing income support
– Make a donation to charity
• To manage costs, best to acquire sooner than later
Thank you
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